Introduction & Background
Since the publication of the IFA
(now ITFA) MPC Bulletin
no 5 in September 2006 on ‘Money
Laundering and “know your customer” checks in Forfaiting - a lot has
happened. The 3rd EU Money
Laundering Directive has been passed into legislation by the various EU
Jurisdictions and the International Chamber of Commerce has published URF 800, the
Uniform Rules for Forfaiting.
In 2006, the ITFA brought to the
attention of its members Guidance Notes issued by the Joint Money Laundering
Steering Group (JMLSG) focusing on paragraphs specific to forfaiting. The JMLSG is made up of the leading UK Trade
Associations in the Financial Services Industry. Its aim is to ‘promulgate good practice in countering
money laundering and to give practical assistance in interpreting the UK Money
Laundering Regulations’.
The JMLSG Guidance is addressed
to those firms regulated in the UK by the Financial Conduct Authority (FCA). Other
firms such as non-bank Forfaiting companies are advised that they ‘should have regard to the contents of the
guidance’. The JMLSG Guidance has gone through a number
of amendments, the latest being the 2014 Revised Version.
Although the JMLSG Guidance is
directed towards UK based institutions, its underlying basis is compliance with
the UK’s Money Laundering Regulations, which implement the requirements set out
in the 3rd EU Money Laundering Directive. Therefore, with the exception of some
jurisdictional nuances, they may be viewed as being broadly applicable for EU
based financial institutions and probably ‘good practice’ procedures for most
financial institutions.
The JMLSG Guidance sets out what
is expected of firms and their staff in relation to the prevention of money
laundering and terrorist financing and is contained in a series of three
volumes which can be found here.
Scope
of this Bulletin
For the purpose of this bulletin,
Forfaiting is taken to mean the ‘without recourse’ discounting of trade or
trade-related payment instruments which are capable of being sold into a
secondary market.
JMLSG
Guidance on Forfaiting
The JMLSG Guidance (drafted with
the assistance of ITFA) contains three paragraphs relating to Forfaiting which
can be found in Part II of the Guidance. These paragraphs are reproduced below:
“Forfaiting
15.51 The diverse nature of forfaiting
business is such that the exact nature of the transaction needs to be
considered. For example, the need to
ensure authenticity may lead to enquiries being made of the importer's
management, and it may be necessary to examine the commercial parts of
documents, dependent on the nature of the underlying commercial transaction.
15.52 In the primary
Forfaiting, or origination, market, a firm will usually be dealing directly
with an exporter, who
will be its
customer and on
whom it should carry
out due diligence
in accordance with Part I, Chapter 5. In addition, as part of its
risk-based approach, a firm, where appropriate, should scrutinise
the other party
to the underlying
commercial transaction, as well as the
transaction itself, to
satisfy itself of
the validity of
the transaction. The amount and depth of scrutiny will depend
on the firm's risk assessment of the client and transaction.
15.53 In the secondary
Forfaiting market, the firm's customer will be the person from whom it buys the
evidence of debt. However if it holds a Forfait asset to maturity it will be
receiving funds from the guarantor bank and thus it should as a matter of
course perform due diligence on this entity as well. Using a risk-based approach,
firms should also consider whether they should conduct some form of due
diligence on the underlying parties to the transaction, as well as on the
transaction itself. This will depend on a risk assessment of the countries and
the types of clients or products and services involved. It may be necessary to
examine documentation on the underlying commercial transaction. However, it
should be borne in mind that the further away from the original transaction the
purchaser of a Forfait asset is, the harder it will be to undertake meaningful
due diligence.”
This Guidance has not changed
fundamentally since it was first introduced in 2006 and it can, therefore be
said to have withstood the test of time. Experience since that date has,
however, clarified the nature of a typical due diligence exercise and helped to
identify the factors which determine the risk profile of a given transaction.
This position fits in well with
the Uniform Rules for Forfaiting (ICC Publication no. 800) which require, under
Article 13, for the primary forfaiter (the forfaiter who arranges the original
transaction) to carry out appropriate steps in accordance with market practice
to ensure that documentation reflects the underlying transaction.
Application of Client Due Diligence
measures in Forfaiting
Drawing on the above sections, a
Forfaiter needs to carry out Customer Due Diligence (CDD) on the entities with
which it has a business relationship i.e. the contractual seller of the
forfaiting transaction as well as the other parties to the underlying transaction
itself.
JMLSG Guidance Part I Chapter 5 discusses minimum requirements for CDD
measures applicable to various types of customers. However, as the ITFA
global membership operates in a broad spread of jurisdictions, many of which
have their own know your client requirements we will not address CDD in this
paper. Although it is worth noting that
the JMLSG considers identification and verification measures to be two distinct
tasks, noting that ‘Identification’ involves obtaining a range of information
whilst ‘verification’ involves obtaining documents from a reliable and
independent source that evidence such information.
In relation to documentation, in
a supplier credit there will normally be fairly extensive documentation which
should be checked in a similar manner to the money-laundering checks applied to
a letter of credit. In a buyer credit, there is typically far less
documentation. This is acceptable provided that the rationale for the absence
of documentation is credible.
However, as pointed out by the
JMLSG, wider due diligence issues are presented in the secondary Forfaiting
market due to the secondary Forfaiter’s lack of involvement in the primary
transaction and the resultant remoteness from other transactional counterparties. (Normal CDD will be carried out on the seller
of the forfait asset).Therefore, as part of their due diligence procedures, secondary
Forfaiters will normally need to adopt internal procedures requiring them to undertake
appropriate due diligence on parties to the transaction with whom they have no
direct contact.
Usually, this is, at the very
least, the obligor. Basic identification evidence should be obtained from
public sources. The supplier having a relationship with the obligor should be
in a position to assist the Forfaiter in obtaining documents which might not be
available through public sources. This requirement may also be satisfied or
accompanied by further investigation and consideration of the supplier’s business
e.g. how do the obligors fit into the supplier’s business patterns, how long
have they traded with them, etc. Where the transaction involves high risk goods
or countries, such checks will normally extend to the original seller or
supplier of goods and in such a case the overall nature of the trading
relationship should be considered.
In addition to the sections on
Forfaiting and CDD measures, additional relevant information can be found in JMLSG
Guidance Section 15, which provides guidance relevant to the Trade Finance
Sector as a whole.
Compliance or Market Practice
It is not the intention of this Bulletin
to cover the requirements of the JMLSG or state that such guidance is mandatory
to all Forfaiters. Whereas the JMLSG guidance notes provide mandatory rules
applicable to UK companies subject to the UK anti-money laundering regime, such
rules are drawn on the FATF recommendations which set international standards
on combating anti-money laundering and financing of terrorism.
Moreover, FATF reports that
implementation of the recommendations by member countries is not always comparable. EU countries are widely compliant, whilst some
other countries are still lagging behind, or even worse, not cooperative at all. This can be seen from the FATF reports on high-risk
and non-cooperative jurisdictions.
One of the key findings in ICC’s
recently published report entitled The Global Survey 2014: Rethinking Trade and
Finance, is that ‘70% of respondents
cited lack of harmonization between jurisdictions as a key problem in KYC/AML’. This situation increases the cost of
KYC/AML due diligence leading to differences between the expected levels contained
in the JMLSG extracts and actual overall market practice.
In conclusion, ITFA members are
invited to refer to the FATF recommendations, JMLSG Guidance and Wolfsberg
Group guidance notes to inform themselves on Industry Best practices
appropriate to their own organizations in order to consider their own approach to
‘Forfaiting - Money Laundering and KYC Checks’.
Sources:
